Tuesday, July 7, 2015

Yesterday's 8% Drop in Oil Prices Means Low Oil Prices, Low Inflation, Small Salary Increases and Slow Economic Growth Are Here to Stay

Oil prices plunged ~8% in Monday's trading. Several reasons contributed to the decline.

{NOTE: In early trading today, prices have dropped another ~3%. See Oil Prices Extend Selloff which is subtitled 'Stronger dollar helping crude as Iran nuclear talks continue.'

In my view, it's a simple matter of increased supply meeting lower demand. And when that happens, prices fall. And for consumers and businesses outside the oil patch, that's a good thing. The Greek and European debacle, China's growth troubles, increased U.S. energy production and inventory levels, a stronger dollar, the likely deal with oil producer Iran, and an ongoing slow growing, debt ridden world economy are all contributing factors.

In any event, prices at the pump appear to be headed down further, and that's a good thing for both U.S. drivers and consumers.

Oil Prices Tumble Nearly 8% has the story:

"Oil prices on Monday skidded to their biggest single-day declines in more than three months, as gyrations in Chinese stocks and the prospect of more crude from the U.S. and Iran revived worries about the global supply glut.

China’s stock markets have plunged in recent weeks, which sparked worries among investors about oil demand in the world’s second-largest consumer. Diplomats are trying to hammer out a final deal on Iran’s nuclear program at the same time Iranian officials have signaled they want to export even more crude than traders had expected. And a “no” vote in Greece’s referendum on Sunday has also bolstered the dollar, pushing down the prices of many commodities in the process.

These concerns are coming to the fore on the heels of data showing the first rise in the number of rigs drilling for oil since December. Also last week, U.S. weekly figures showed an increase in crude-oil stockpiles for the first time in nine weeks.

“All signs point south for oil prices,” analysts at Capital Economics wrote in a note on Monday.

The U.S. benchmark oil price slid for the third trading session in a row, closing down $4.38, or 7.7%, to $52.53 a barrel on the New York Mercantile Exchange. Monday’s losses are the biggest in percentage terms for a single session since February . . . .

Capital Economics lowered its year-end price forecast by more than 8%, it said in its note. That puts U.S. oil at $50 a barrel to end 2015 and Brent at $55.

For two months, oil prices had remained relatively stable at around $60 a barrel, and their breakaway from that area means the selloff is likely to deepen, said Mark Waggoner, president of brokerage Excel Futures.

Oil is likely to slip just below $50 a barrel, the last area it stabilized in back in February, he said. Iranian exports and the resilience of U.S. producers make it increasingly unlikely that bulls will see the production declines they expected, Mr. Waggoner added. “I still think production is going to increase,” he said. “There’s a whole gambit” of bad news for oil. . . .

The turmoil in Chinese stocks is yet another sign of the wrenching economic transformation that is under way in the Asian giant. For investors, the concern is that the Chinese government may struggle to contain the problems, broadly slowing growth and demand for oil along with it.

The sudden slump in Chinese stocks “is a huge cause for concern and as such can’t be bullish for oil,” said Tamas Vargas, an analyst at PVM brokerage in London.

In Vienna, Iran and six world powers are negotiating in an effort to reach a final agreement on curbing Iran’s nuclear program. The Wall Street Journal reported Iran wants to double oil exports to 2.3 million barrels a day if a deal is reached and sanctions are lifted.

The victory for the “no” vote in Greece’s referendum on Sunday has also prolonged the uncertainty in global crude-oil markets. . . . because oil is a dollar-denominated commodity, a stronger dollar often drags prices lower."

Summing Up

The world is awash in both oil and problems.

And expanding energy supplies are running into lower energy demand, always a price destroyer.

In the U.S., the recession has ended. However, continuing slow growth in both prices and salaries will be the reality. 

That said, inflation is no longer a concern, at least not for several more years. The expanding oil supply and a strong dollar represent more good news for U.S. consumers as prices paid for energy, other imported commodities, and many consumer goods will remain under control for the foreseeable future.

On the other hand, debt stabilization and repayment will force people to live 'below our means' for years to come. This will be in sharp contrast to our well established habit of living 'beyond our means.'

All that said, things are improving in the U.S. and will continue to do so in the low inflation, slow growth, small salary increases, consumer debt reducing environment on the horizon.

It's not all great, but it's not all bad either.

That's my take.

Thanks. Bob.

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